Competing with Cash Buyers for Fix-Ups

Boston.com carried the article linked below a couple of weeks ago that continues to resonate. http://www.boston.com/realestate/news/articles/2011/10/02/real_estate_becoming_a_cash_economy/

Cash buyers for foreclosures and short sales are beating out offers from buyers who make offers contingent upon mortgages with 3.5% to 30% down.The properties are in the lower price ranges with lots of potential for increased equity with some sweat equity or cheap labor. Besides the cash deal, banks see  other advantages to the a cash offer. Cash buyers often waive a home inspection, can close in 2 weeks and there is no bank appraisal. The cash buyers offer less than the buyer looking for a mortgage and still get the cash offer accepted. 

Why don't banks and short sellers choose the buyer with the mortgage? The mortgage deal can fall apart close to the closing due to the mortgage appraisal process. So the mortgage approval process can take a property off the market for a long time and fail to get the property off the bank's books. Then a variety of physical house problems may not pass Fannie Mae appraisal standards: exterior paint, roof repair, a heating system or hot water heater, bath room repairs, holes in the wall ..... . Coming at the end of the buying process, sellers (banks and owner) are unwilling to spend money on appraisal repairs and the purchase falls apart for the buyer looking for a mortgage. Fannie Mae which is guaranteeing almost 100% of the mortgages these days, have lots of good reasons to want the work done before the buyer closesBuyers often use their financial cushion to purchase. With no cushion, there would not be money to make the repairs.

I've got two alternatives for buyers who need a mortgage looking at fix-ups. 

 (1) The buyer should prepare for a 203K loan with their loan officer. Many banks will take the 203K loan that sets aside money for the necessary repairs as part of the buying process so that the bank or seller does not have to do last minute repairs. The buyer has an additional $1000 to pay out for a 203K consultant who works up the necessary work plan and looks over work completed by a licensed contractor. The banks will agree to the 203K mortgage. (2) The buyer can get approval with a hard money lender (high interest, interest only loans) to become a virtual cash buyer. The high money lender will hold the mortgage short term for 3 months or so while doing the repairs. When the house is ready, the buyer goes for a conventional mortgage. The buyer can offer less because they now are making a cash offer. The money the buyer saves on the purchase can be applied to the interest only payments with the hard money lender.

Any questions, feel free to contact me.